Don’t underestimate China’s staying power

Revisiting the ‘bear case’ for China has become a rote exercise. Investors point to a litany of systemic issues: derating valuations, anaemic sentiment and long-term growth forecasts slashed amid geopolitical tensions and punitive tariffs. Many investors are now conforming to the narrative: China is a market mired in overcapacity, debt and disinflation with little near-term reprieve in sight. 

This consensus is not unfounded. China’s growth model — long driven by investment rather than consumption — has calcified. The tight grip of the Communist Party of China (CPC) over credit allocation and capital formation has led to persistent over-investment and supply gluts.

In such an environment, consumption stalls, savings rise and disinflation takes root. Animal spirits prove to be difficult to revive. The property sector, still under stress, continues to erode household wealth and dampen confidence. Policymakers, wary of moral hazard, have little appetite to rescue developers who thrived on cheap and excessive credit.

While social pressures remain contained, the economy appears impaired. Absent a structural pivot or a regime of ‘credibly irresponsible’ policies, deflationary forces will not simply linger — they will deepen. That, at least, is the accepted view and has been increasingly priced in by markets.

But these long-held concerns risk missing a broader truth: that necessity rather than complacency may be engineering a paradigm shift. For all its constraints, China is adapting in ways that could defy expectations, particularly in areas of innovation and technological sovereignty.

Down with the chips

Amid rising geopolitical headwinds and trade restrictions, China’s resilience lies in its capacity to innovate under duress. As access to Western technology narrows, China has doubled down on self-sufficiency: most evidently in artificial intelligence, critical minerals and energy. Unlike the infrastructure booms of the past, these developments are not just brute force investments. They are strategic, targeted and strike at the heart of augmenting productivity.

Nvidia’s CEO, Jensen Huang, recently noted that US export restrictions may have backfired and galvanised China’s own development in AI. That prediction is playing out. Huawei’s Ascend chips and Xiaomi’s advances in AI hardware showcase how local champions are filling the void. Huawei’s AI chips, while technically inferior to Nvidia’s CUDA-equipped offerings, are nonetheless commercially viable. China also dominates global mature-node semiconductor production, with 80–90 per cent of the world’s supply — a strength often overlooked by Western markets focused solely on cutting-edge nodes.

Nvidia’s H20 chip, whose re-entry into China’s market was briefly curtailed earlier this year, has since resumed shipments. While unlikely to meaningfully disrupt China’s domestic trajectory in generative AI, the move is incrementally positive. Hyperscale cloud operators had already stockpiled graphics processing units (GPUs), mitigating any near-term bottlenecks. Still, the reintroduction of H20 will be welcomed by Chinese server makers. Compared to Huawei’s Ascend series, limited by both yield and architectural inefficiencies, the H20 remains a higher-performance solution.

Beyond chips, China’s broader push for self-sufficiency and autonomy is gaining traction across a wide range of sectors. Rare earth mining, where China commands more than 60 per cent of global supply, underpins its strength in electric vehicles and renewables. In aerospace, the C919 commercial aircraft signals a growing ambition to compete with Boeing and Airbus. Agricultural biotech, EV battery technologies and robotics all point towards a diversified industrial strategy that is now beginning to deliver returns.

Western sanctions

None of this is accidental. These developments are tightly aligned with Beijing’s strategic imperatives. With a shrinking labour force and ageing population, China faces a productivity reckoning. AI and automation offer a potential remedy. They also support the government’s broader goals: tighter control over information, enhanced surveillance capabilities and an innovation-driven economy less exposed to Western sanctions.

AI in particular has become a pillar of China’s future planning. According to PwC, China stands to gain as much as $7tn from AI by 2030 — equivalent to 26 per cent of its projected GDP, the highest proportional benefit globally. This is not only an economic bet but a political one. Being at the technological frontier reinforces the Communist party’s long-term authority and sovereignty. 

The implications for global capital allocators are stark. China may no longer be the growth story of the past — driven by property, infrastructure and exports — but it is becoming something else: a market defined by innovation, backed by industrial policy and increasingly undervalued.

Investor positioning reflects deep scepticism. US markets remain heavily crowded, with China allocations near multi-decade lows. Yet the case for reappraisal is strengthening. Sectors aligned with industrial technology, automation and domestic consumption offer compelling long-duration opportunities. Rising trade hawkishness from Washington will only raise the incentives for China to deploy countercyclical stimulus. With GDP targets fixated at 5 per cent, this could provide further tailwinds to consumer-linked sectors.

More importantly, the relative value argument is becoming harder to ignore. While US equities trade near all-time highs on stretched multiples, Chinese markets reflect a level of pessimism that may already be excessive. Valuations are low, balance sheets are healthy and policy is increasingly aligned with long-term industrial competitiveness.

In short, the bear case for China is not wrong, but investing is a game of implied expectations. In a world defined by technological bifurcation and shifting geopolitical alliances, China’s response has not been to retreat but to reinvent. Necessity, as it turns out, still breeds invention.

Kunal Desai, portfolio manager of GIB Asset Management’s Emerging Markets Active Engagement Fund